The Internal Revenue Service imposes several types of penalties on tax preparers (those who prepare tax returns for others). A firm employing a preparer can also be subject to consequences for an employee’s failure to follow due diligence requirements. These penalties are codified in Internal Revenue Code Sections 6694 and 6695 and include: a) Understatement due to unreasonable positions; b) Understatement due to willful or reckless conduct; c) Failure to furnish a copy to taxpayer; d) Failure to sign return; e) Failure to furnish identifying number; f). Failure to retain copy or list; g) Failure to file correct information returns; h) Negotiating of check payable to another person; i) Failure to be diligent in determining eligibility for certain tax benefits. In this article, we are discussing the “failure to be diligent in determining eligibility for certain tax benefits” preparer penalty (IRC section 6695(g)).

For tax period 2023, each separate violation of IRC section 6695(g) results in the imposition of a $560 penalty (the amount is adjusted for inflation). For a return or cliam for refund filed in 2025, the penalty that can be assessed against you is $635 per failure. The penalty is imposed on each failure to exercise diligence for each and every tax benefit—i.e., the penalty can be imposed multiple times for each tax return/taxpayer/client. For instance, a separate penalty can be imposed on the failure to exercise diligence when the taxpayer/client claimed any or all of the following on his/her tax return: 1) Earned Income Tax Credit; 2) Child Tax Credit/Additional Child Tax Credit/Credit for Other Dependents; 3) American Opportunity Tax Credit; 4) Head of Household. Therefore in 2025, if due diligence requirements are not met on a return or claim for refund claiming the EITC, CTC/ACTC/ODC, AOTC and HOH filing status, the penalty can be up to $2,540 per return or claim for refund.

Preparers must meet the Four Due Diligence Requirements codified in Internal Revenue Code section 1.6695-2(b)1-4: 1). Complete and Submit Form 8867—This must be based on information obtained from your client or information you otherwise reasonable obtain or know; 2) Compute the Credits—This must be based on information obtained from your client or information you otherwise reasonably obtain or know; 3) Must have use knowledge of taxpayer/client information and tax law; 4) Must Keep Records for Three Years—Preparer must keep a copy of: The completed Form 8867; The completed worksheets used to determine the amount of each credit; A record of the information used to complete Form 8867 and the worksheets; Any documents you relied on to complete Form 8867.

The IRS can also assess due diligence penalties against an employer if an employee fails to comply with the due diligence requirements. The Internal Revenue Service can also take the following actions against preparers: 1) Suspension or expulsion from IRS e-file; 2) Disciplinary action by the IRS Office of Professional Responsibility; 3) An injunction barring the preparer from preparing tax returns for others; 4) Criminal penalties if filing fraudulent returns.

Gene M Bowman, Bowman Law Firm

Tax Attorney, Huntsville Alabama